Winter weather events rarely affect Wall Street. But most of them aren’t as costly as the one we just experienced.
The “polar vortex” that swept the country over the last couple weeks set record-low temperatures from Wisconsin to Hawaii. At one point it was colder in Atlanta than it was in the South Pole. Yikes.
Mercifully, the cold air has subsided in most places. Even here in Vermont, temperatures are back up in the 40s (a welcome change from the minus-35-degree wind chills we felt less than two weeks ago). But the damage was already done.
Economists estimate that the polar vortex will cost the U.S. economy $5 billion when all is said and done. The weather affected approximately 200 million people, leaving many without electricity or heat and rendering car batteries (including this writer’s) dead. Those who did have heat and power huddled at home to stay warm, shunning the malls, movie theaters and local eateries.
That’s the broad picture of how the record cold affected Americans. Now let’s look at three more specific ways it put a dent in the U.S. economy – and how those dents could reverberate on Wall Street.
1. Slower First-Quarter GDP Growth. Several economists have projected that the polar vortex will reduce Q1 GDP growth by 0.1% to 0.2%. That sounds like small potatoes when you consider that GDP grew by 4.1% in the fourth quarter. However, GDP growth has steadily improved for four consecutive quarters. Topping 4.1% this quarter could prove difficult considering it was the third-best quarterly growth rate the U.S. economy has seen since the recession. A tenth of a percentage point or two could mean the difference between improved growth and a minor step backward.
2. The Airlines Took It On the Chin. Some 7,000 flights were canceled in just two days last week. JetBlue (NYSE: JBLU) grounded its entire fleet in New York and Boston at one point. That’s not good for business. The effect on airline stocks has been relatively muted thus far. JetBlue shares declined 4.5% last Monday but have since recovered. United Continental (NYSE: UAL) shares dipped 3.2% in two days but have since vaulted to a six-year high.
The short-term ramifications for airlines was negligible. But all the canceled flights will certainly eat into first-quarter profits, with cost of cancellations expected to reach $1.4 billion. That could make for an underwhelming earnings season for airlines three months from now.
3. Too Cold to Build. Frigid temperatures and icy weather already took their toll on the economy in December. Last month, the labor-force penetration rate plunged to a 35-year low in large part because 273,000 people were off the job due to weather. For comparison’s sake, only 84,000 and 127,000 were out of work, respectively, the last two Decembers.
Homebuilders were hit hardest. Employment in construction fell for the first time in seven months. At a certain point, it simply becomes too cold to build.
And that was December – before temperatures dropped to sub-Arctic levels. Odds are, homebuilding will be slower than expected again this month. Perhaps in anticipation of the weather-induced construction drop-off, the SPDR S&P Homebuilders ETF (XHB) – which tracks the likes of Toll Brothers (NYSE: TOL) and Lennar Corporation (NYSE: LEN) – has fallen off 3% in the past two weeks.
We’ll see if that trend continues.
In the $17 trillion U.S. economy, a $5 billion loss amounts to a drop in the bucket. Superstorm Sandy cost the U.S. economy two or three times that much in 2012.
However, in this 24-hour news cycle, markets tend to overreact – and individual stocks certainly do. The polar vortex has had little immediate impact on stocks. But for sectors such as airlines and homebuilders, the loss of business is a bit more significant.
No, the weather outside isn’t frightful enough to send the entire stock market plunging – even if it slows GDP growth. For certain sectors, however, it may take a few months to thaw out from the deep freeze.
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